Small Caps Stall Amid Weaker Economic Data

Small cap stocks, which surged after President Trump’s election and through last summer, have stalled a economic data has weakened and investors have begun bracing for a possible recession. This according to a recent article in The Wall Street Journal.

The asset class is generally considered “riskier in periods of stress and more prone to a pullback because of their inconsistent earnings, higher debt levels and lack of diversification in their business activities,” the article reports. It cites comments from Summit Global Investments CIO David Harden: “Most people think of small-cap as higher growth, higher return, a little more risky,” adding, “They don’t want to be there in the late phase of the business cycle.” The article adds that, despite small caps collecting most of their revenue from domestic businesses, they haven’t been immune to trade tensions.

Another reason for the lagging performance, the article says, is the weighting of financial companies in the Russell 2000: “Financial stocks have been under pressure this year because lower interest rates tend to hurt banks’ net interest margins, a key measure of lending profitability.”

But some believe the asset class is ripe for stock picking, quoting GuideStone Capital Management CIO Matt Peden, who says small caps don’t enjoy the same level of coverage by Wall Street analysts and “therefore you’re able to uncover stocks that haven’t actually priced in all the information.”